US And Germany Sign Protocol To Bilateral Income Tax Treaty

by Ulrika Lomas, Tax-News.com, Brussels

05 June 2006

The US Treasury Department announced last Thursday that Deputy Secretary, Robert M. Kimmitt, and Barbara Hendricks, Parliamentary Secretary of State for the German Ministry of Finance have signed a new Protocol to amend the existing bilateral income tax treaty, concluded in 1989, between the two countries.

The agreement, signed in Berlin last week, significantly reduces tax-related barriers to trade and investment flows between the United States and Germany. It also modernizes the treaty to take account of changes in the laws and policies of both countries since the current treaty was signed.

The most important aspect of the Protocol deals with the taxation of cross-border dividend payments. The Protocol is one of a few recent US tax agreements to provide for the elimination of the source-country withholding tax on dividends arising from certain direct investments and on dividends paid to pension funds.

The Protocol also provides for mandatory arbitration of certain cases that cannot be resolved by the competent authorities within a specified period of time. This provision is the first of its kind in a US tax treaty.

In addition, the Protocol strengthens the treaty's provisions preventing so-called treaty shopping, which is the inappropriate use of a tax treaty by third-country residents. The Protocol also modernizes the treaty relationship in several ways and brings it into closer conformity with current US tax treaty policy.

Welcoming the updated agreement, Deputy Secretary Kimmitt stated that:

"The signing of the Protocol today reflects the cooperation and close economic ties between the United States and Germany. The Convention is also an important signal to investors that the doors to foreign investment remain open both in Germany and the United States."

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